OTW #061: How & why to invest in biotech, Mining stocks are set to surge, and more.
Important financial stories to check out over the weekend
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1. Are mining stocks ready to surge?
I’ve been writing about the gold and silver rally for a few weeks. Tavi Costa, a partner at Crescat Capital, believes that mining stocks are ready to join the party:
This week marked a pivotal moment for silver as it confirmed one of its most significant technical breakouts in decades.
Notice how the trend started with gold, then silver and copper began to move, and now, in my view, it’s a matter of time for the miners to follow suit.
Few industries are as universally disliked as mining today.
In fact, to be blunt, very few people can put three sentences together about the mining space.
If metals continue to display resilience, which I expect they will, these companies could present some of the best distressed opportunities in recent memory.
The lack of capital interest and the scarcity of geologists and other workers entering the mining industry is setting the stage for one of the most supply-constrained environments in history.
From my perspective, this segment of the market is indeed one of the most inefficiently valued today.
But let us not forget:
In the money management industry, inefficiency is often a synonym for opportunity.
Antagonist’s take
To invest in mining companies, you can buy a basket of them via an ETF, or you can buy individual stocks. In our Blend Portfolio, we do both. If you’re an Antagonist Premium Member, you can view the full list here.
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2. Review your portfolio concentration.
In a thought-provoking post, “Over Concentration In Your Portfolio Tends To End Very Badly,”
explains why investors should assess how top-heavy their portfolios are right now.Gayed showed that 32% of the S&P 500 is concentrated in its top 10 holdings. The Nasdaq 100’s makeup is even more staggering: 40% of the index is still concentrated in the “magnificent 7” stocks.
While this handful of companies has provided excellent returns for investors over the past year, rallies like this don’t last forever. Here’s Gayed in his own words:
If you’ve been heavily invested in this group over the past year, congratulations! You’ve probably enjoyed some pretty hefty returns! However, if you’re banking on these types of returns continuing, you should probably adjust your expectations now. In fact, it’s probably a good time to reassess your portfolio allocation altogether. The more these stocks go up in value, the more concentrated and top-heavy the major indices become. The concentration is fine on the way up, but it’s likely to be painful on the way down…
Investors have only been interested in mega-cap growth & tech and that’s been the case for a long time.
That creates a big overconcentration problem. Investors are very overweight in this category and are exposing themselves to significant downside risk should conditions change. Everybody thought the same during the tech bubble 20+ years ago too. The internet was going to change everything, so investors bought up every tech and internet stock they could find regardless of valuation or business viability. Looking at you pets.com! The internet was indeed revolutionary, but the tech bubble burst regardless. We could be heading for a similar fate today, the only difference being that AI takes the place of the internet as the major catalyst.
How big is the concentration problem? It’s created a market that we haven’t seen in 100 years!
Antagonist’s take
Earlier this month, I discussed how to balance concentration and diversification to achieve big gains while managing risk.
I still don’t advocate dumping all your magnificent 7 holdings right now. They could very well continue to rally. I do recommend, however, implementing risk management strategies like trailing stops and/or protective puts.
3. How and why to invest in biotech.
In the most recent Stansberry Investor Hour podcast, Erez Kalir discussed why biotech stocks are a strong contrarian play today. In fact, the industry is so hated that you could considered them to be value stocks. That’s crazy to say because biotech is generally known for volatility and explosive growth (and crashes).
My favorite part of the interview was when Kalir explained his framework for biotech investing (begins at the 30:50 mark). Here are the variables he analyzes:
The science
The opportunity—sizing the addressable market and performing an expected value analysis
The capitalization (cap) table—list of the company’s largest shareholders divided into 3 subcategories: insiders, the “smart money” (short list of the most accomplished biotech investors in the world, and the “whales” (large financial institutions or big pharma that have a big stake in the company)
The balance sheet
The catalysts
The big picture and how it impacts the opportunity
The overall risk/reward
Antagonist’s take
I’m a big fan of frameworks, and I use them myself. None of them are flawless, but the good ones help keep your emotions in check and ensure you’re executing due diligence.
As Kalir explains, however, not every element of a framework is equally applicable to every situation. Depending on the market’s context, some components are far more valuable than others. I recommend listening to Kalir’s explanation (starting at 30:50) to hear specific examples how this plays out in the real world.
Last thing...
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Thank you for reading, and have a great weekend!
Jason Milton
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